Your Small Down Payment Options: Saving for a Down Payment
The down payment is the first—and potentially biggest—financial investment towards buying a home. With a standard down payment of 20 percent being common, many individuals are left interested in purchasing a home but not able to set aside such a large amount of money as a down payment. It can be expensive to buy a home between initial down payments and closing costs; does that mean that those who can only afford to make a small down payment must delay their purchase?
20 percent down payments may be the norm, but they are not the only option. Homeowners with strong enough credit may be able to pay as low as 3–5 percent down towards their home and pay PMI until they reach the 20 percent threshold. Others might utilize no-down-payment loan programs, such as the USDA or VA home loans.
Lenders and Your Down Payment
Lenders generally feel more secure when an applicant for a mortgage loan can put down a larger down payment. Such payments create initial equity in a home, and history has shown that such individuals are less likely to walk away from making payments. Lenders may want such borrowers, but that does not mean that they will not approve applicants who may only be able to offer a smaller down payment on the purchase of a home. According to the National Association of Realtors, on average, first time home buyers are putting down only 6 percent.
Pay More with a Small Down Payment
Generally speaking, those borrowers making a small down payment and going for a conventional loan, will be spending more money paying back a loan than those who can make a larger down payment. First of all, the balance of the loan is typically larger. Interest rates on the loan may be higher. In addition, approved borrowers may be also obligated to pay Private Mortgage Insurance, or PMI, on a conventional loan until a significant amount of equity is established in a home. This additional fee protects lenders and will need to be paid until 78 percent of the balance is left and none of the payments go toward paying off the loan. There are ways to get out of paying PMI early but they take a bit of time and effort on the part of borrowers. Borrowers able to make a down payment of 20 percent do not have to pay PMI.
Borrowers can choose to put down less when taking out a conventional home mortgage, whether they live in Rolling Hills or elsewhere. In fact, borrowers may choose to pay as little as 3 percent when working with programs such as HomeReady™, Home Possible® Advantage or Conventional 97. These are all conventional mortgage loan products.
There are other options that may be useful. The Federal Housing Administration or FHA offers mortgage products allowing for small down payments as low as 3.5 percent, but PMI will be required for the life of a loan. Those looking to go down this route may want to get money for this down payment through a down payment assistance program or by using a financial gift. Veterans may be able to get qualified for a VA loan. This type of loan does not require a down payment or mortgage insurance.
What to Do
There are many expenses that will come with buying a home. For some, having extra savings rather than tying it into the purchase of a home makes sense. Closing costs can range from 2 to 7 percent of a home's purchase price, and homeowners will need to have a budget for this aspect of buying a home too. Review the programs available before choosing a conventional or government backed mortgage loan product and understand how small down payments may influence rates and additional fees.
It is possible to get into a home without making a large down payment. Many first time homebuyers need the extra cash for closing costs or to pay for initial repairs, and utilizing these home loan and financing options can help those looking to make a small down payment.